I have a question about the 4x4 lock. I understand that when you push the lock it locks the front and rear together, but in non lock mode what and where is slipping. Is there a friction clutch in the transfer case, and if so how much difference in the front to rear must it see before it locks in. thanks.

There is more to it than that. 4Hi allows the transfer case to act as a differential between the front and rear wheels. Turning corners, and the tires not having the exact same circumference requires that they are able to rotate independantly to each other (because they are covering different distances) on hard pavement or they bind up the driveline, which causes chatter and squeal as they slip on the ground. It's rough on the entire driveline because of the binding. That is why it's VERY important to not use 4HI Lock or 4LO Lock on dry pavement. Now once the 4HI Lock or 4LO Lock switches are used the transfer case locks the front and rear wheels together so they rotate at exactly the same speed. Low traction surfaces like sand, snow, rocks, allow the wheels to slip the driveline is no longer bound up and you don't feel the chatter.
This same principle applies to the locking diffs. If you have a 2009 with front and rear lockers once in 4LO lock with the front and rear diff locks engaged ALL 4 WHEELS ROTATE at the same speed. That is why it's so hard to steer in this mode. DON"T wreck your driveline. Never, Never use the 4 HI Lock or 4 LO Lock on hard pavement.
That chattering is bad. Your truck is saying "don't do this to me"!

Living in the mid-west this time of year, there's a bit of snow. I prefer the 4hi lock in these conditions, because I like to feel a bit of slide to know where I'm at. I have, however, found that I sometimes forget to switch it back to 4hi Open when I hit dry pavement, usually on a highway condition. Obviously a highway condition doesn't experience the same wheel binding as city driving, but is there any harm in high-speed highway driving in the "lock" mode?

Also I've noticed the system will not shift back to "open" at high speeds (60-70 mph). What is the maximum speed that the transfer case will allow you to change back to "open"?

The same rules apply, actually it's way tougher on the driveline. Instead of slipping slowly now it trying to slip at high speeds. The tires need to rotate at slightly different speeds and the "lock" will not allow this to happen. The tires have to slip on the ground or the driveline will break something. That is the only two possibilities. The reason it won't shift back to open is that the gears inside the transfer case have a load on them and they can't disengage. If you stop, and keeping the wheels straight, back up slowly it will most likely go out of the lock mode. You may have to shift into neutral to help it. I stop and roll very slowly in fwd then put it in neutral while I'm rolling. If that doesn't work usually stopping then shifting in reverse will unload the gears and allow them to shift out of "lock". Don't do this with the wheels turned because the turned wheels have to rotate at different speeds and will keep the load on the gears. The driver front, driver rear, passenger front, passenger rear tires are all covering different distances as you truck turns on a radius. Always get your vehicle to go in a straight line when engaging or disengaging 4 hi, 4 hi lock, 4 lo lock, front diff locker, rear diff locker. You need to stop doing this or your going to suffer the conditions of badly worn tires and/or driveline damage. This is why when you see films or have driven in places like moab you hear the tires chirping and black rubber all over the red rock. On the NP231 transfer cases used in jeeps there are kits that allow you to have 2 wheel drive low to prevent driveline damage but still have a nice gear reduction to crawl/drive slow.

"4^ lock(Four-Wheel-High Lock): Use this mode when you need extra traction in most off-road situations such as sand, mud, snow or level, rocky trails.

Notice: Operating your vehicle in Four-Wheel-Low Lock above 30 mph (48 km/h) for
any extended period of time could cause damage to the transfer case. Do not operate your vehicle in Four-Wheel-Low Lock above 30 mph (48 km/h)
for extended periods."

All you really need to know is, the H3 is set up for driving by idiots. 85-90% of people driving these things NEVER need to mess with the T Case buttons. They do pretty well in most off the pavement driving (trail riding, and hard packed dirt) without needing Hi Lock. Lo lock is for the rough stuff. Read the manual before you go pushing buttons and driving around.

Examples:
Regular old Hi.... like ANYTHING on the pavement. (Note the 2WD turkeys).

I have just encountered a major design flaw of the H3. The locking fork in the transfer case is PLASTIC (for crying out loud) and melted at 61k miles. $750-$1k to pull T case and replace. The part is $24. Only 4th time in 4-low.